Sebi appoints EY, Deloitte for joint audit of NSE brokers

Audit firms mandated to see if brokers, clients made profit by preferential access to colo facility

Capital markets regulator Securities and Exchange Board of India (Sebi) has ordered a joint forensic audit to establish collusion between brokers and officials of the National Stock Exchange (NSE) in the co-location controversy.

The regulator has appointed two audit firms — EY and Deloitte India — to conduct a forensic audit in the matter. “The firms have been mandated to examine and to ascertain if brokers and their clients made any profit by gaining preferential access to the co-location (colo) facility of the NSE,” said a source with direct knowledge of the matter.

An e-mail to the Sebi spokesperson did not elicit a response. 

Sources said Sebi chose two auditors so that the process could be expedited. Both firms are expected to divide the list of brokers between them and submit the report in the next two months.

Earlier, the NSE had appointed Deloitte for a forensic audit which had established that the trading systems at the exchange’s colo facility were prone to manipulation. But, the firm wasn’t able to find any proof that entities of the ecosystem made any monetary gain. 

Meanwhile, EY is currently auditing the alleged systemic issue with the NSE's cash and currency segment. 

“The regulator wanted to hand over the matter to the firms, which have already dealt with the exchange on ongoing issues,” the source said.

Sebi’s latest move could be critical in determining the finality of the case, which the regulator has been probing since 2015. 

On June 14, Sebi Chairman Ajay Tyagi had said in a letter, “Sebi is in the process of appointing a forensic auditor to inter alia determine the benefits/profits made by stockbrokers and their clients, software providers and any other entity by getting preferential access/treatment from the NSE.”

“Sebi has initiated a comprehensive investigation to examine connivance/collusion of the NSE’s employees with stockbrokers and any other entity to facilitate preferential access/treatment from the NSE,” the letter added.

The Sebi chairman had briefed Lok Sabha MP Kirit Somaiya on these developments and about the action taken so far in the matter.

Based on an internal examination, Sebi had issued show-cause notices (SCNs) to the NSE and 14 officials for alleged violations of Securities Contracts (Regulation) Act and Stock Exchange and Clearing Corporation rules. 

The SCN mentioned failure on the part of NSE officials in ensuring fair access and non-cooperation during the examination.

Meanwhile, the exchange is keen to settle the unfair access controversy through the consent mechanism. But, the hearing got delayed as members of the high-powered advisory committee faced conflict of interest due to their direct and indirect association with the exchange. Sebi is mulling to induct new external members to hear the consent plea.

The allegations of preferential access against the NSE are for a period between 2011 and 2014, when certain brokers allegedly exploited the gaps in the algo-trading system to gain unfair access.